Google Inc. avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before, filings show.

By legally funneling profits from overseas subsidiaries into Bermuda, which doesn’t have a corporate income tax, Google cut its overall tax rate almost in half. The amount moved to Bermuda is equivalent to about 80 percent of Google’s total pretax profit in 2011.

The increase in Google’s revenues routed to Bermuda, disclosed in a Nov. 21 filing by a subsidiary in the Netherlands, could fuel the outrage spreading across Europe and in the U.S. over corporate tax dodging. Governments in France, the U.K., Italy and Australia are probing Google’s tax avoidance as they seek to boost revenue during economic doldrums.

Last week, the European Union’s executive body, the European Commission, advised member states to create blacklists of tax havens and adopt anti-abuse rules. Tax evasion and avoidance, which cost the EU 1 trillion euros ($1.3 trillion) a year, are “scandalous” and “an attack on the fundamental principle of fairness,” Algirdas Semeta, the EC’s commissioner for taxation, said at a press conference in Brussels.

“The tax strategy of Google and other multinationals is a deep embarrassment to governments around Europe,” said Richard Murphy, an accountant and director of Tax Research LLP in Norfolk, England. “The political awareness now being created in the U.K., and to a lesser degree elsewhere in Europe, is: It’s us or them. People understand that if Google doesn’t pay, somebody else has to pay or services get cut.”

I'm not sure I can add much to that comment: this is now literally a case of "us or them". And right now they're winning at cost to us.

I know of one individual (not a client) who saved £1.5m by his company paying a dividend before the 50% tax was introduced. And I’m fairly certain he won’t be paying a dividend this side of April 6, 2013!

I don’t see the problem here. On the previous debate on Microsoft you put forward a strong argument that all monies need to be repatriated to shareholders to support the share price. That must apply here too and so the tax will be payable.

If we assume that artificial profit shifting to escape tax is not a good thing (and some would disagree with that!), what are the options available to prevent multinationals from doing exactly that?

I read the TJN paper on unitary taxation with interest but the complexities of a transition from the existing ALP principle towards an alternate tax base which requires international cooperation seems (even in the current climate) a bridge too far. Moreover, the complexity of such a system would play straight into the hands of advisers and potentially create an alternative set of avoidance loopholes!

One principle which is sound, however, is the axiom (as the report states) “that tax should be paid according to where the activities generating the income take place”

All companies make a declaration of turnover in the tax returns they submit the world over. Introducing a percentage tax on a company’s annually published turnover is a simple and effective way of ensuring companies pay tax within the countries they operate in.

Obviously, there are some issues with a simple turnover tax but let me be clear that this is a one-off tax on ‘accounting turnover’ and not a tax on sales through the production and distribution chains (which obviously have negative social repercussions)

In the Starbucks / Costa example, Starbucks paid nil tax on a turnover of £398m and Costa £15m on a £377m turnover.

How about we establish a turnover tax threshold over and above say £350m which requires companies to pay the higher of the turnover tax percentage (say 2.5%) or the normal tax due under normal principles.

In the above example, Starbucks would pay nearly £10m and Costa £15mn.

The tax is effectively, therefore, an anti avoidance measure (not a revenue raising measure) designed to limit the effectiveness and value of profit shifting from the UK.

Advantages? Simple to calculate (even HMRC couldn’t mess this one up!), easily enforceable (no need to worry about advisers finding loopholes) and more importantly *fair* because companies with similar economic activities pay similar amounts of tax.

I wonder why such a simple system (with appropriate safeguards) has not been mentioned in the existing debate?

Over time, no tax is ever paid by capital for the simple reason that companies target after tax return on capital invested, so if taxes rise, pricing (or costs) are adjusted to compensate. However, in a situation where one company was able to avoid taxes while its competitors can’t (Starbucks versus Costa), changing legislation to prevent the tax avoidance would cause the additional tax to be paid by capital as it cannot adjust prices without reducing competitiveness.

Over time can be instantaneous depending on the industry, and whether it is a price setter or price taker. If we imposed an additional 20% tax on the banks today, by tomorrow the spreads on every new lending product would go up to compensate for it. Products are priced to achieve an after tax ROE, so a change in the tax rate merely feeds up the calculation to change the price.

To clarify, companies do not pay VAT, we the public do and it is indeed (as are all sales taxes) regressive since it is not linked to income and one’s ability to pay.

Do we care, however, that the turnover tax is regressive on companies since surely the debate here is about taxing economic activity where it resides and not about the ‘artificial’ profits which that activity generates?

As a consumer, why shouldn’t companies pay their fair share and be taxed on their turnover?

I suppose we could argue companies could pass the additional taxes on but that’s true of any increased costs within a business. At a minimum, however, there will be some equity between companies operating in similar industries with similar turnovers and the profit shifting element will have been negated to a certain extent.